Yelp Inc (YELP, Financial) operates a platform that connects people with local businesses in the United States, spanning local business categories like restaurants, shopping, beauty and fitness, arts, entertainment and events, home and local services, health, nightlife, travel and hotel, auto and other categories. The company hosts an online database of user-generated reviews of local businesses.
Yelp reported first-quarter fiscal 2015 results last month. As it is, Yelp shareholders have had a rough ride, with shares tanking almost 33% during last one year and a loss of around 26% year-to-date. Is his sell-off an opportunity to open a position? Let’s take a look.
Looking back
Yelp reported a year-over-year revenue growth of 55% to clock $118.5 million. However, investor’s weren’t pleased when the looked at prior year’s year-over-year growth of close to 72%. Being a business review site that it is, one of the important markers is cumulative review growth, which serves as a good indicator of user engagement on the company’s platform.
Sadly, this number registered a year-over-year decline of 12% from 47% to 35%. Also, the monthly unique visitors growth fell from 37% in the prior year to just 13%. Even the change in Google’s ranking algorithm did nothing to boost this number up or at least let it remain flat. The huge drop in the growth of monthly unique visitors shows a slowdown, and is enough to spook even the most optimistic investor.
Gross margins declined from 88.56% to 86.84% versus the same quarter last year, operating (EBITDA) margins now 2.23% from -1.23%. The company reported loss of $0.02 per share, versus a loss of $0.04 per share in the comparable period a year ago.
Looking forward
For the second quarter, the company expects the revenue to be in the band of $131 million to $134 million, representing a 49% year-over-year growth. The adjusted EBITDA for the second quarter is expected to be in the range of $22 million and $24 million.
For the fiscal year 2015, Yelp reiterated its outlook and the full-year revenue is expected to be in the range of $574 million to $579 million, representing approximately 53% year-over-year. The adjusted EBITDA is expected to be in the range of $102 million and $105 million, representing a year-over-year gain of 46%
Growth drivers
Yelp bought Eat24, a U.S. food delivery business that competes with GrubHub, Delivery.com and others in the business of delivering food on behalf of various restaurants. This acquisition should help the company on two fronts –Â it will give the company more contact points with restaurants, and beef up its core listings business with additional revenue stream.
“As more food ordering transactions move online, further integrating Eat24 will enhance our user experience with an easy-to-use product and service that allows our large consumer audience to transact directly with businesses,” said Jeremy Stoppelman, Yelp co-founder and chief executive officer, in a statement.
“Eat24 has developed a great solution and unique service that has already added great value to the Yelp Platform. With this acquisition, we gain more tools and expertise to help engage our users from discovery through transaction in a key vertical for Yelp.” Eat24 currently has about 20,000 restaurants on its platform across 1,500 cities.
This acquisition will be a long-term growth driver going forward.
In 2013, Yelp had already acquired SeatMe, the startup that set out to pitch itself against OpenTable in the restaurant reservation space. The SeatMe acquisition has performed well.
Looking around
In the U.S. market, Yelp is up for stiff competition from Google (GOOG, Financial)(GOOGL, Financial) and Amazon (AMZN, Financial) as both have announced their intention to launch their own review services. Amazon has more than 230 million users and will leverage its Amazon Home Service business. Once launched, Amazon’s service can gain traction vey quickly, posing a stiff challenge for Yelp.
Final words
Yelp’s very high sales and marketing expenses will take its toll on the bottom line. This means that the bottom line will expand at snail’s pace, much to the discomfort of investors. Google’s correction of algorithm did not bring in any positive result for the company. With impending competing review services from the likes of Amazon and Google, Yelp does face some real threats. However, internet users tend to be sticky and Yelp does have a first mover advantage here.
Yelp could also be a take-over candidate, due to low absolute valuation, and an acquisition potential somewhat limits downside for Yelp relative to the upside. The company isn’t burning cash like many high growth companies and it has a strong balance sheet. Hence it is worth a buy for long-term investors. But, keep in mind that Yelp is a speculative investment and competitive risks are very real.
